“We’re moving well, making a lot of progress on these issues,” Waxman said. “We’re getting very, very close.”

We’re starting to hear details of the sausage-making led by chief climate chef House Energy and Commerce Chair Henry Waxman (D-CA). Needless to say, it ain’t pretty.

E&E Daily (subs. req’d) reports this morning:

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Rep. Henry Waxman (D-Calif.) bought himself a little bit more time yesterday to produce a consensus on global warming and energy legislation….  Waxman pledged to produce a new version of draft legislation next week while again promising to pass the bill out of the full committee before the Memorial Day recess….

Negotiations on the climate bill continue to focus on four key issues: the stringency and timetable of the cap-and-trade program’s emission limits, the use of offsets to ease industrial compliance costs, allocation of valuable allowances and the structure of a nationwide renewable electricity standard.

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Waxman met with a cross-section of regional Democratic interests yesterday to work through those areas, including Rep. Charles Gonzalez of Texas; Reps. Brian Baird and Jay Inslee of Washington; and Reps. Zach Space, Marcy Kaptur and Betty Sutton of Ohio.

So what are the compromises?  No big surprise — they are straight out of the (lame) USCAP deal, starting with a bunch of free credits to industry:

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Sponsors of the legislation appear to be inching closer to a deal on the distribution of emission allowances that begins by giving away as much as 55 percent of the credits for free: 40 percent for the local distribution companies that service the electric utility industry, and 15 percent for heavy industries deemed especially vulnerable to international trade.

After about 10 to 15 years of the cap-and-trade program, the free credits would phase out in favor of an auction, said Rep. Mike Doyle (D-Pa.).

While the final details remain to be worked out, Waxman acknowledged that he is comfortable with distributing credits for free as a way to help industries transition into a low-carbon economy and during the period when an international climate agreement takes shape. “We’re not using allocations just because people would like some revenue,” Waxman said. “We’re doing it for very legitimate purposes within the integrity of the bill.”

And free allowances may be exactly what some fencesitters need. “I want to vote for a bill, but I’m not going to vote for a bill that’s going to hurt my ratepayers extremely,” Hill said.

As for free allocations, Hill said they could be a stepping stone to his support. “That would be a good thing, if that happens,” he said.

Several lawmakers supportive of a larger auction also sound willing to appease their coal-state colleagues. “You can’t just flip the switch,” said Rep. Peter Welch (D-Vt.). “They’ve got legitimate concerns.”

“There’s an inevitability to that,” Senate Foreign Relations Chairman John Kerry (D-Mass.) said of Congress including free credits in the climate legislation. “I would prefer to have a 100 percent auction, but I’m also a realist and I understand that legislatively we’re just not going to be able to do that. The key is to minimize the allowances in a way that’s transparent, accountable and we go from there.”

I don’t lose as much sleep over the free allocations issue as some, since

  • They were inevitable (as the Waxman and Kerry comments make clear)
  • This addresses the regional fairness issue that even Obama raised concerns about
  • This shouldn’t directly affect the permit price (to first order — more on that in a future post), and
  • They will be sunset.

If you want to know the “logic” behind this, here is USCAP’s justification:

Electricity and Natural Gas Consumers: Because cost-of-service Local Distribution Companies (LDCs) are regulated, unlike other impacted sectors they will be required to pass through the entire value of allocated allowances to their end-use consumers.

This will directly facilitate the key objective articulated earlier for any allocation—facilitating the transition for consumers and businesses as consumers of electricity. Consequently, USCAP recommends allocating a significant portion (e.g., 40%) of emission allowance value directly to these entities specifically to dampen the price impact of climate policy on electricity and small natural gas customers, particularly in the early years of the emission constraint.

The magnitude of allowance value allocated to LDCs should reflect, but not exceed, the share of capped emissions attributed to the consumers served by the
LDCs, and then be phased-out. Consumers would realize this value through some combination of rate adjustment and demand reduction through programs designed to improve energy efficiency and  promote zero- or low-emitting energy technologies.

Also, no surprise, the 2020 target moved back toward the USCAP figure:

Lawmakers are also narrowing in on a 2020 emissions limit, another central piece of a final agreement. Obama’s budget request suggested a 14 percent cut below 2005 levels by 2020, while Waxman had pressed for a 20 percent cut. Several of the Democratic moderates had initially suggested a 6 percent target for 2020, but Waxman balked at that proposal.

Butterfield said yesterday that he would be willing to accept Obama’s targets. “Let’s shoot for 14 percent,” he said. “I can live with 14 percent.”

I will discuss in a later post why this is a mistake, albeit another inevitable one (see, for instance, “Is 450 ppm politically possible? Part 8: The U.S. needs a tougher 2020 GHG emissions target“).

I am, of course, especially interested in whatever deal they come up with on rip-offsets.  With the lower 2020 target — and with the massive reallocation as yet primary cost-containment measure — we shouldn’t increase the number of rip-offsets, nor weaken there oversight.  We should sunset them, just as the free allocations will be the sunsetted (see “The one simple change that could vastly improve Waxman-Markey: Sunset the rip-offsets“).

I will post more details as they leak out.  Fire away!